Broker dealers should take the time to test their risk-management controls for trading glitches or systems errors that can cause major disruptions to markets and to investors, a top regulatory official said yesterday. Richard Ketchum, the head of the Financial Industry Regulatory Authority said that although many firms had improved their controls, a single error or breakdown could cause massive harm to investors. Better testing of algorithms and software changes would prevent erroneous orders and potential violations. "Firms must test the controls and related procedures at least annually to ensure they work as intended and are effective given the firm's current business activity," said Ketchum who was speaking at the Security Traders Association's Annual Market Structure conference. The push for tighter risk management controls has gathered steam since the May 2010 "Flash Crash" and Knight Capital's $440 million trading loss due to a software failure. In 2010, the Securities
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